New Tax Rules for Foreign Real Estate Investors

New Tax Rules for Foreign Real Estate Investors

New tax changes bring good and bad news for foreign real estate investors in the US for 2016.

What’s new? Who will pay more real estate taxes? Who will pay less? How can foreign investors minimize their exposure to taxes going forward?

The PATH Act

Obama signed the PATH Act into law just before we rolled into 2016. Among the amendments in the Protecting Americans from Tax Hikes omnibus bill are a number of tax breaks and extensions of exemptions for real estate investors. This includes tax free gains on qualified small business stock, and accelerated depreciation on some types of real estate investments. Among the new changes facing foreign investors and real estate professionals that serve them this year are several tweaks for foreign investors buying and selling US property. These will effect real estate closings happening February 2016 and after.

Boosting Foreign Real Estate Investment

According to the Florida Association of Realtors (FAR) new changes allowing foreign investors to double their holdings and percentage of ownership in US REITs will conservatively “boost foreign investment in US commercial real estate by $20-$30 billion per year.”

Foreign pension funds are also no longer subject to Foreign Investment in Real Property Tax Act (FIRPTA) withholdings. This could make Florida property far more attractive to the world’s biggest funds, many of which are already very bullish on buying US property.

Minimizing Taxes for Individual Investors

In order to offset the big multi-billion dollar breaks for foreign funds, the FIRPTA withholding rates are being raised for individual foreign investors.

Here’s what you need to know:

  • Sales of properties valued at $1M or more will now be subject to 50% more in FIRPTA tax, at a rate of 15%.
  • Sales of properties from $300k to $1M may still pay the lower 10% tax rate if they can prove the property was a personal residence.
  • Sales of properties $300,000 or less can be exempt from FIRPTA if it can be proven they are designated as residences.

Withholding amounts are normally collected by title companies at closing to protect all parties and to comply with regulations.

Together with new anti-money laundering regulations which are targeting the identities of $1M plus sales in Miami, Florida, and high end sales in NYC, these new tax changes could add a lot of fuel to the lower end of the real estate market. This may skew future housing statistics as more sales occur under $1M and under $300k, with potential to significantly reduce inventory in the affordable housing range. Yet, it should make 2016 an even busier year for FL property.